With Morrisons shares tanking by 6 per cent yesterday in response to what was received as a poor set of annual results, investors will be weighing up whether this represents a buying opportunity or a clear sign to stay away from the big supermarkets' shares.

Morrison's said its full year profit was up in 2016 for the first time in six years, climbing 49.8 per cent to £325 million. Despite this, the market was decidedly unimpressed and the shares fell 16pence to 230pence, although a bit of that has been clawed back today.

The supermarket's two FTSE 100 peers Sainsbury's and Tesco are also due to report results in the coming weeks with Sainsbury's first on 16 March and Tesco following on 12 April, shedding further light on how the sector is faring in the time of Brexit.

Morrisons shares fell 7% after it revealed its full year results

All three of these companies together with their smaller, non-FTSE 100 peers face the same set of potentially formidable headwinds to contend with. As does the fourth of the big four, Asda, but that is a wholly owned subsidiary of US giant Walmart so not publicly listed.

First there is the significantly weaker pound, with the UK's currency sitting 18 per cent lower than before the referendum at $1.22.

The key issue with this is the upward pressure on import prices, both for production inputs and ready to sell items made abroad. This squeezes margins for supermarkets as they find it difficult to pass the cost rises onto the consumer fully due to the competitive nature of the sector.

The next major factor hitting Morrisons and co is the rise of the European discounters in the UK groceries market. New data from market analysis firm Nielsen has revealed Aldi and Lidl have managed to claw out a 12 per cent share of the UK market. They do not seem to be going away any time soon.

It is not all doom and gloom though, with the supermarkets' share prices showing remarkable resilience over the past eight months since the Brexit vote, in a similar way to the UK economy as a whole.

Another FTSE 100 supermarket, Sainsburys, is due to reveal how it has fared on 16 March

Even after today's fall Morrisons shares are still approximately 25 per cent higher than they were the day after the referendum, Sainsbury's shares are 14 per cent up at 261 pence and Tesco's are 12 per cent higher at 185 pence.

This performance is perhaps what emboldened Sainsbury's CEO Mike Coupe to publicly say he believes supermarket chains could actually benefit from Brexit, because a squeeze on consumer spending means less eating out and takeaways, and more reliance on supermarkets for food to cook at home.

Can this strong run continue though, or is the reality of Brexit about to bite, and weigh on the supermarket's share prices?

'I think as a general comment, Morrisons was written off far too soon,' said Wealth Club's Ben Yearsley. 'It had decent market share, even when it was at the nadir and a strong franchise in many parts of the country.'

Yearsley acknowledged the threat from Aldi and Lidl but sees the UK supermarkets as rising to the challenge, in certain ways.

'Aldi and Lidl have been taking market share for over a decade now and that has massively hurt the big four - yet they still account for 70 per cent of the grocery market in the UK,' he said.

'Where the big four differentiate themselves now is by the breadth of their product range and move away from merely groceries. Sainsbury's purchase of Argos last year was a fascinating one to see if they can successfully cross sell and have two brands in the same store.'

That is not to say investing in the supermarkets is without risk, Yearsley explained.

'The supermarket sector is a tough place to invest. Margins are being squeezed and with the increase in oil and decrease in sterling their input costs are on the rise. If they can pass these price rises on to the consumer then all well and good, but with Aldi and Lidl properly breathing down their neck now that remains to be seen.'

In terms of the current valuation Yearsley picked out Sainsbury's as appearing to offer a decent price. 'Sainsbury's on a PE of 11 and a yield of 4.6 per cent looks ok value, I think there are better value plays out there at the moment though, such as financials, with less structural problems.'

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Looking at Morrisons in particular, Ian Forrest, investment research analyst at The Share Centre sees the stock as a 'hold'.

'These results show Morrison's' is building up some momentum in its sales' recovery and this trend could have further to run,' he said. 'However, the shares have largely kept pace and now trade at a rating higher than their rivals.'

'Competition concerns are not going to go away and management initiatives will take time to execute so we continue to recommend Morrison's as a 'hold' for medium risk investors with a balanced portfolio. For those interested in this sector, our preference remains for Marks & Spencer.'

'This was widely anticipated by the market given a strong Christmas trading statement which included an upgrade in underlying profit before tax guidance and good like-for-like performance reported periodically by Nielsen/Kantar Worldpanel.'

'That said, and despite the positive performance reported this morning by Morrisons, the environment should remain extremely challenging this year especially given the impact of the exchange rate on imported goods prices,' Lundie added. 'Morrisons and the food retailers will have to decide between maintaining their current profit or passing the increases in costs on to customers at the risk of losing market share.'

'We believe Tesco's credit profile has improved in recent quarters with improved like-for-like trends, a focus on cash flow generation and on debt paydown,' Lundie continued. 'The management has been adapting the company's strategy in line with the current trends affecting the food retail industry, meaning lower prices, better in-store experience, and the launch of their farm brands range last year.'

Tesco has had a rocky few years and will next update the market on its prospects on 12 April

Turning to look at the FTSE 100 supermarkets through the lens of their dividends, Hargreaves Lansdown equity analyst George Salmon sees mixed prospects for the three.

'Recent difficulties at Tesco saw the group battening down the hatches and scrapping the dividend,' he said. 'With trading looking more positive, and the group set to acquire Booker, which should ease worries about its balance sheet, it announced it will be recommencing a payout in 2017/18. This could be a token payment initially, to be built on in the future.'

'Morrison's owns the majority of its stores. This means relatively little cash is tied up by leases, so the group generates significant free cash flow. With debts expected to fall below £1bn in the coming year, the dividend looks safe for now.'

'Sainsbury's has also trimmed the dividend, and another cut this year shouldn't be discounted. Looking forwards, much hinges on the Argos deal. After all, Mike Coupe has himself called it a career defining moment.'

Salmon also warned against reading too much into the price to earnings ratios for the three supermarket chains when making an investment decision.

'With earning depressed and uncertainty ahead, PE valuations don't make for the most useful comparisons just now. At present, Sainsbury's PE is 13.4 times, Tesco is on 18.6 times and Morrison is on 20.3 times.'

Seven Investment Management's Ben Kumar noted that all three will do almost anything to avoid dividend cuts even if their profits fall, but there is likely to be no let up in the pressures they are contending with.

'Cutting dividends is still seen as a bad sign – and these businesses are held in so many UK Income funds that a divi cut would maybe lead to forced selling,' he said. 'Management is aware of that, and therefore will do everything it can to keep that divi high.'

'The old saying used to be that Tesco will never go out of business, so you should be comfortable holding it forever,' Kumar added. 'Equally, Warren Buffet bailed out a year ago! There is a real risk that supermarkets earnings will continue to decline – both form internal sector competition, and from external challenges. The economic moat they used to have is now much smaller – Amazon will be flying drones over that moat very soon!'

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